Based on the discussed case Wal-Mart has been successful in the discount retail market through their cost advantage over their competition. They have been able to do this most significantly through superior cost structure, specifically the following: inbound logistics, rental expenses, hard goods verse soft goods, licensee fees, and payroll expenses.
Wal-Mart was able to sustain about half the normal industry cost of inbound logistics (figure 6), because of the establishment of their distribution centers. These distribution centers, once established, were able to serve up to 175 stores within a 150 to 300 mile radius. While the initial start up cost for the distribution center was $5 million, the cost was quickly recovered and the savings fed directly into Wal-Mart’s gross margins. This allowed Wal-Mart to maintain lower costs in it’s stores and not only edge out competition that may be previously established, but also discourage the entrance of other companies in to the area.
The next way that Wal-Mart established its superior cost structure was through it’s rental expenses. By 1985 all but 47 or Wal-Mart’s 859 stores were leased out. Store leases could be easily renewed for up to 15 years. The building rentals accounted for 1.8% (figure 1) of sales, the lowest level for any major discounter. The lower cost of building rental allows Wal-Mart to turn a larger profit then it’s competition without raising its prices to do so. These lower rental costs have been maintained through the years by the acquisition of Bargain-Basement and also the increase of sales per average square foot.
This increase in sales per average square foot is best explained by Wal-Mart’s focus on hard goods verse soft goods (see ...